Herbalife Falls as Market Favors Ackman Over Argus

By Ben Levisohn

Shares of Herbalife (HLF) have dropped today as comments from hedge-fund manager William Ackman negate an Argus upgrade.

Bloomberg News

Argus analyst John Staszak raised Herbalife to Buy from Hold. He explains why:

The company has reported double-digit revenue growth for 15 consecutive quarters, and we expect earnings to remain strong. We are raising our EPS estimates from $4.80 to $5.10 for 2013 and from $5.80 to $6.00 for 2014. Based on management’s comments that the company’s balance sheet is underlevered, we expect accelerated share repurchases in the second half of the year. The company is stepping up the production of botanical ingredients in China, and has invested $130 million in a new manufacturing facility in Winston-Salem, North Carolina. HLF has also signed Portuguese soccer star Cristiano Ronaldo to promote a new line of sports nutrition products. We are reaffirming our five-year BUY rating, based in part on the potential for earnings growth above that of peers. In addition, the company’s balance sheet remains among the strongest in its sector

Ackman, however, told investors in his second-quarter letter that Herbalife could be in big trouble. The New York Posthas the details:

Ackman told investors in his second quarter letter, which The Post has obtained, that he has made “material progress” in attracting federal, state and international regulatory interest in the company he believes is a pyramid scheme.

“We are not at liberty to disclose the nature of those developments, but we believe that the probability of timely aggressive regulatory intervention has increased materially.”

Ackman noted that the Securities and Exchange Commission, which the company has said has opened an inquiry into Herbalife, has prosecuted pyramid schemes, including one of the seminal pyramid cases.

Shares of Herbalife have fallen 0.7% to $64.24 today at 11:39 a.m., while GNC Holdings (GNC) has fallen 2% to $50.67, Avon Products (AVP) has dipped 0.2% to $20.61 and Nu Skin Enterprises (NUS) is little changed at $86.18.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.